U.K. Inflation To Hit 10%, Bank Of England Takes Base Interest Rates To 1%

May 5, 2022

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By Cristian Bustos. Originally published at ValueWalk.

U.K. inflation has reached a 13-year high of 10%, prompting the Bank of England (BOE) to increase interest rates by 0.5 meaning that the base interest rate is now 1%. It is the fourth consecutive hike since December, as households have had to grapple with record consumer prices.

U.K. Inflation Worries

As reported by CNBC, the Bank’s Monetary Policy Committee approved a 25-basis point hike by a majority of 6-3, while the minority favored a 0.5 percentage-point increase to 1.25%.

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The BOE is taking measures as the ongoing war in Ukraine has had an enormous impact on an already inflation-ridden economy, as the annual U.K. inflation soared to a 30-year record of 7% —tripling BOE’s set target.

As the Russia-Ukraine conflict rages on and the Chinese authorities implement stifling lockdowns to tackle Covid, inflation in the U.K. is expected to reach 10% in 2022.

The BOE has gone to assert that prices might increase faster than income for millions of people, paving the way to a major living cost crunch.

Strategist Hussain Mehdi says: “Looking ahead, energy prices and China lockdowns are key risk factors, but scope for inflation to cool later this year and the impact of a significant household income squeeze on growth could eventually push the bank on a more dovish path.”

Growth To Drop Sharply

The Bank’s MPC explained that “Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth.”

When asked about the reason behind the interest rate hike, Governor Andrew Bailey said, “The point being is we are walking this very narrow path now.”

“The proximate reason for raising [the] bank rate at this point is not only the current profile of inflation and what is to come and of course what that could mean for inflation expectations to come —but the risks as well,” he added.

The BOE expects the GDP growth of the U.K. to decelerate abruptly during the first half of the forecast period, which, “predominantly reflects the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins.”